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While the market is improving, millennials and Gen-Zers have faced a difficult path to homeownership.
For the first time in modern history, these two generations are among the first to be financially worse off than their parents at the same stage of life. Factors such as record-high home prices, lingering inflation and mounting debt, specifically from student loans and credit cards, have created significant challenges for first-time buyers.
In 2025, nearly 27% of Gen-Zers nationwide owned their homes, according to a report from Axios. That rate nearly doubled for millennials with slightly more than 55% owning their homes. However, both generations are still trailing their parents with nearly 73% of Gen Xers and 80% of baby boomers owning their homes.
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As housing affordability continues to be a challenge for many, especially for those who are younger, tapping into a 401(k) retirement plan might seem like a practical option, but there are trade-offs. What needs to be considered before a withdrawal is made?
The hidden cost of limiting compounding growth
Pulling from your retirement account to make a down payment seems logical in theory: You’re not retiring for several more years, yet you need a roof over your head today.
However, this thought process doesn’t account for the power of compounding growth. When money is withdrawn early, it’s not just the principal that disappears. It’s also the decades of potential growth that money could have generated by remaining in the account. Assuming a modest average annual return of around 7%, withdrawing around $20,000 from a retirement account at age 30 could mean missing out on more than $130,000 by age 65. That’s a significant amount of money that could otherwise be used to supplement medical costs, pay for long-term care or used for additional real estate or traveling.
Once money leaves your retirement account, it no longer has the ability to grow with the rest of your investments.
As a result, retirement savings are often seen as one of the most important “protected” accounts in a portfolio. While the funds can be used to solve a short-term problem, withdrawing them early could create future challenges.
Penalties might be waived, but taxes still apply
Another factor that’s easily overlooked is the tax implications of withdrawing retirement funds. Even when early withdrawal penalties are waived, money taken from a 401(k) or IRA will be taxed as part of your income. For the average working American, that tax rate can fall from 18% to 32%. A withdrawal of $20,000 could lead to thousands of dollars owed in taxes.
In addition to a hefty tax bill, money withdrawn from a retirement account loses the benefit of tax-deferred growth, significantly reducing the value of those savings long-term.
Evaluating retirement security vs homeownership
Making the decision to use retirement savings to purchase a home typically comes down to balancing two major financial goals: Retirement security and homeownership.
Becoming a homeowner provides stability and gives you the opportunity to build equity over time. For many Americans, it’s also viewed as a significant milestone financially and emotionally.
Simultaneously, retirement savings rely largely on time spent in the market and consistent contributions. As a result of compounding, younger Americans in their 20s and 30s generally benefit the most by starting early and saving consistently.
Using retirement funds prematurely eliminates that chance, which can make it much more difficult to build enough savings long term.
Costs of homeownership extend beyond the mortgage
It’s common for first-time homebuyers to focus primarily on saving for a down payment, but homeownership costs much more than the price of the home. Beyond your monthly mortgage payment, you’ll also have to pay property taxes, insurance, utilities and maintenance, not to mention any unexpected repairs that are needed such as a new roof, HVAC system or appliance.
Many financial experts recommend running a full financial “stress test.” The test calculates the total expected monthly costs, including mortgage payments, taxes, insurance premiums and a maintenance reserve, which allows you to see if homeownership is manageable in your current financial situation.
Other options to consider
Before targeting retirement accounts, first-time buyers should explore other lower-risk alternatives.
One option is to build a dedicated down payment fund by regularly setting aside money from each paycheck. Automating contributions to a separate account can help accelerate the process, while keeping you disciplined. Utilizing tax refunds, bonuses or scaling back discretionary spending can also help grow savings.
Family gifting might also be a possibility. Current tax laws allow a person to give significant amounts each year without triggering gift taxes. This can help supplement any gaps in savings.
Depending on where you live, many states, organizations and housing agencies might offer down-payment assistance through programs such as FHA, VA or USDA. These programs are designed to help buyers break into the housing market without sacrificing long-term savings.
What to consider before making an early retirement-savings withdrawal
For first-time buyers considering pulling retirement funds to help purchase a home, it’s worth asking: Does this withdrawal create a gap in my retirement savings that might be difficult to recover from later?
While buying a home might feel urgent and the benefits can be rewarding, protecting long-term financial security might be the better option.
Most of the time, it’s better to borrow for a home instead of taking from your future retirement.
